Derivatives | M

Mirror Swap

An offsetting or opposing
swap which is designed to close out the
market exposure of an existing swap position. For example, a
fixed-rate-paying party to
an interest rate swap
could enter into a mirror swap to cancel the original agreement,
whereby that party become a
floating rate payer . This has the effect of reversing (unwinding)
the swap position, rather than simply cancelling it. The reverse
swap is written with the original counterparty, and hence it helps
reduce credit risk, since all negative flows under the original
agreement are applied against positive flows under the second
agreement.